Mr. MORGAN. It might. I do not know what the effect of it would be, but I do think you have that problem. That is the effect of this upon the renegotiation.

The CHAIRMAN. I asked about that yesterday in the hearing. If you are renegotiating and then at the same time you terminate the contract, what is going to happen? The renegotiation is not settled, you are still going on, and you terminate the contract, you make a settlement under this act with the contracting officer.

Mr. MARTIN. Here we are giving the contracting officer the power to go in and settle completely. Not only that, but pay in advance on a contract that may be in dispute under renegotiation.

Mr. MORGAN. Of course, if you have a contract which is subject to renegotiation and it is terminated, and you know that renegotiation cannot be had after a year has expired, after the contract is completed, well now, you are not going to be very anxious to get that settlement finished, you are going to hem and haw and back and fill, and everything else, to use up a little time so when you finally reach a settlement agreement the Price Adjustment Board may only have 2 days, it may not have any time, it may have already expired.

So I do think you have to consider the effect of this on the renegotiation.

Mr. BURTON. I want to bring this in, that under the formula which is to be found on page 3 of the termination clause for lump-sum contracts, it provides that

The contracting officer shall estimate the profit which would have been realized on the uncompleted portion of the contract,

And so on.

When that question arose yesterday as to what would be done in the event it was found that the profit was excessive, they said that the answer was that the contract could be renegotiated. So your remarks become very pertinent, as far as that is concerned.

Mr. MORGAN. The contract of settlement, or the original contract? Mr. BURTON. The original contract.

Mr. MORGAN. Yes. That is only true if a year has not expired.

Mr. BURTON. That is true.

The CHAIRMAN. Well, we have got a picture of it. See what you can work out, Mr. Morgan, and let us know.

Mr. MORGAN. Yes, sir.

(Whereupon, at 11:45 a. m., the committee adjourned, subject to the call of the Chair.)

TO AUTHORIZE THE SECRETARY OF WAR TO USE
FUNDS FOR ADJUSTMENT OF CONTRACTS

MONDAY, JUNE 28, 1943

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE OF THE COMMITTEE ON MILITARY AFFAIRS,

Washington, D. C.

The subcommittee met, pursuant to call, at 3 p. m., in room 1310, New House Office Building, Representative Carl T. Durham (chairman), presiding.

Present: Representatives Durham (chairman), Sikes, Martin, and Fenton.

Also present: Representative May (chairman of the full committee); Mr. H. Ralph Burton, general counsel, Military Affairs Committee.

The CHAIRMAN. The committee will come to order.

This meeting has been called for consideration of H. R. 3022, which has to do with the termination of contracts of the War Department, Navy Department, Maritime Commission, and Procurement of the Treasury.

We have with us Col. Kenneth C. Royall.

STATEMENT OF COL. KENNETH C. ROYALL, DEPUTY FISCAL DIRECTOR, WAR DEPARTMENT

The CHAIRMAN. Colonel, what we would like for you to do is to tell us what you know about this. Our primary purpose is to try to analyze and arrive at a bill here that will expedite the termination of these contracts all over the country.

Colonel ROYALL. Well, this bill is not directed at the solution of all the questions arising out of termination. It is directed simply to the temporary and other financing necessary in connection with the termination.

The entire subject of termination is one of many angles. It includes, among others, the contract provisions relating to termination, which has been the subject of discussion between the War Department, the Navy Department, the War Production Board, and others for some months.

It includes what contract provisions should provide for settlement by negotiation of the claims that may arise.

It includes the method of disposition of the surplus materials which will result.

It also includes the audit and administrative procedures which may have to be supplemented by legislation, or may not.

The CHAIRMAN. Well, now, do you people feel you have at the present time funds for the expenditures for these settlements of socalled claims?.

Colonel ROYALL. We feel, sir; that the funds which are obligated, or may be obligated, for the performance of a contract are also available for any termination of that contract, for the reason that the contract itself provides for its own termination.

Mr. MAY. That is the very question that I have been studying, why it is necessary for the War Department to ask for additional legislative authority in order to do the things necessary to consummate or conclude a contract made under the authority of the appropriations already made by Congress.

Colonel ROYALL. It does not, in my opinion, sir, require any legislation for that purpose.

This bill, may I add, is not for that purpose, and I think possibly it has been misunderstood and may be the subject of misunderstanding because of the way in which it is drawn. I don't know.

This bill is directed to one very narrow part of the termination problem, but a very important part, particularly for the small manufacturer. That is, the method of making immediately available, or available as soon as possible, some cash when the contract is terminated. As you know, there has been a very widespread and insistent demand to spread the contract work among the smaller manufacturers. As I understand it, the War Department has gone a long way toward doing that, particularly in the last several months. Those manufacturers, in many instances, in an effort to help with the prosecution of the war and, of course, also to get business for themselves, have taken a volume out of proportion to their

Mr. MAY. Their working capital.

Colonel ROYALL. Their working capital. The sudden termination of Government contracts would leave those small manufacturers in a very serious financial condition, unless some funds could be readily made available to them.

Now, that is also true of some very large companies who have made contracts in amounts which exceed their normal facilities, financial facilities.

Mr. MAY. Haven't some of the larger contractors also entered into obligations under contracts far in excess, in a pecuniary sum, of their entire capital stock?

Colonel ROYALL. Absolutely, sir.

Mr. MAY. Surpluses and everything else they have-their assets. Colonel ROYALL. That is right; and the problem is not confined to the smaller companies. It is perhaps, on the average, more serious for the small company, because the larger companies have a little better credit facilities.

Mr. MAY. Banking connections.

Colonel ROYALL. Yes. Now, this bill seeks to do two things. The first one is to provide, in the case of termination of contracts, the same privilege of advance payments and loans as is now available for the contract while it is being performed.

The second thing it seeks to do is to enable the Government to purchase, or, if you want to put it differently, to acquire by assignment, a claim of a subcontractor or supplier. That is all it seeks to do.

Today we have, under the War Powers Acts and Executive Order 9112, with which some of you may be familiar, a system of advance payments and guaranteed loans. I don't want to give you any figures which may not be entirely accurate. Colonel Mechem is out there, who has handled that for the War Department. My recollection is that there have been advance payments totaling $4,000,000,000 and guaranteed loans slightly over $2,000,000,000.

Now, I am sort of patting the fiscal office on the back a little-I am one of its deputy directors-but the credit really belongs to Colonel Mechem and Colonel Cleveland when I say that advance payments and loans have been conservatively and efficiently handled in such a manner that at the present time the Government is not faced with any problem of loss in those transactions.

The CHAIRMAN. That is guaranteed loans.

Colonel ROYALL. Guaranteed loans and advance payments too. Of course, with advance payments it is easier to provide against a loss because you can take care of it in the payments that the Government makes.

The CHAIRMAN. Do you feel that you have authority for those advance payments?

Colonel ROYALL. We feel that we have authority for advance payments under the First War Powers Act, which provides for the making of contracts which will facilitate the prosecution of the war, and an advance payment is a contractual arrangement.

Now, there has been some thought that 9112 may be broad enough to cover the matter of loans also. I think, however, a reading of it gives rise to some doubt as to whether it is broad enough, and there is a more serious doubt, possibly, as to whether it could be broad enough, because the War Powers Act is related to the prosecution of the war itself.

The CHAIRMAN. Yes, but when you come up here for an appropriation, don't you say, "We want so many planes, we want so many tanks, we want so many guns, at a certain cost"?

Colonel ROYALL. Yes.

The CHAIRMAN. That is all included in that, and it is assumed by the Appropriations Committee that is to be spent directly for those items finished and completed. Unless you have got some set-up, or ask for some appropriation to pay the damage claims, where is it coming from?

Colonel ROYALL. I don't think, sir, that that presents any difficulty, because when you make a contract to buy an airplane, or a thousand airplanes, you are entitled to obligate the Government under that contract, and obligate your appropriation for it, and when you fail to carry out that contract the obligation of the Government to pay for its failure is a part of the same contractual obligation for which you have already bound your appropriation. This principle has been universally applied, I think, at the present time and I believe you will find that the General Accounting Office has accepted that without question.

Mr. MAY. That is just the very point I was going to ask you about. Since the appropriation is made for a specific purpose, of buying so many airplanes, doesn't it necessarily and impliedly follow that if you have got the power to make a contract, with the Ford Motor. Co., say, to produce those planes, that you have got the power to

continue the performance of the contract to the end, and then wind it up and pay it out?

Colonel ROYALL. I think that is an absolutely accurate statement. Mr. MAY. Then, have the requests for this legislation been the result of a lot of Army officials, in the responsible position of disbursing officers, wanting to protect themselves against personal liability? Colonel ROYALL. Not at all, sir, so far as I know. I am right familiar with how it originated. It originated not to meet the problem that you mention, but solely to meet the advance-payment and loan problems.

Mr. MAY. To these small businessmen?

Colonel ROYALL. Well, be they small or large, but primarily the most important problem is that of the small businessman.

Now, the other feature of the bill is the section (c)-I believe it is in one of the drafts-about the purchase of the claims. That to me is a very important feature. Here is a contractor who is expanding beyond all normal limits. He makes a contract with the Government. He may make on it or he may lose on it. Some of those people are going to lose on those contracts. They made a bad bargain and they are going to suffer from it. I do not think the Government wants to put anybody out of business, but sometimes a man makes a bad contract and it certainly ties him up at least.

Mr. MAY. And when he has failed and lost the Government official dealing with him is in the embarrassing position of having to recognize his situation or pay out money without authority.

Colonel ROYALL. That is right-well, I am not really concerned with the fellow, in this particular act, who made the bad contract. I am concerned with the fellow who subcontracted under him. Mr. MAY. That is who we are looking at.

Colonel ROYALL. Here is a man that made a bad contract and here is a small company that subcontracted with him. That subcontractor hasn't got a contract with the Government.

The CHAIRMAN. He has it with the prime contractor.

Colonel ROYALL. He has it with the prime contractor. At the same time, we all know that he is led to take a larger commitment because he is helping the war effort. Now, something ought to be done to provide that type of fellow some protection.

The CHAIRMAN. Suppose he started up with a "V" loan?

Colonel ROYALL. Of course, that is another feature of it. If he has got a "V"loan sufficiently large, he does not have to worry. But we don't want that tendency to develop. This legislation will tend to prevent people trying to get excessive "V" loans, which is inflationary. What we want to do under circumstances similar to that, and other circumstances, is to provide that the Government might in some way take over the claims of this sub against the prime.

Now, there are several ways in which that could be done. We think we have singled out the least objectionable way. All of them have some objections. The Government may lose money in any arrangement, but here are two or three ways it could be done. One is by the Government guaranteeing the obligation of all prime contractors. That is taking in a lot of territory.

Another way it could be done would be to set up an elaborate system of credit insurance-charge a premium for it. That makes a lot of bookkeeping and personnel, and may not be satisfactory.